In the wake of the Enron scandal, the United States enacted the Sarbanes-Oxley Act of 2002 (“SarbOx”) to answer the outcry for transparency and accountability. The Enron scandal revealed malfeasance at the highest levels, with executives and controllers modifying financial data to present a false image to investors and the public. To prevent future occurrences of such fraud, SarbOx requires corporate officers to implement and certify internal control structures that enable identification of financial misstatements. Such controls and certifications bring confidence to investors, ensuring a ready flow of their capital to companies regulated by SarbOx.
While SarbOx brought accountability and transparency to publicly-traded companies, other entities are free from its strictures. These other entities, including state and local governments, educational institutions, and non-profits, need not implement internal control structures or certify such structures. This lack of accountability and transparency hurts both the public and the entities themselves. The public is often left with the impression that these entities are, at the least, wasteful and incompetent, spending taxes, fees, or donations in an out-of-control manner. And when these entities seek to raise funds through the issuance of bonds, they are forced to offer higher interest rates on the bonds in order to attract investors. The long term implications of this dynamic have been sadly displayed in the sovereign debt crises of Europe in the summer and fall of 2011: a total loss of a public's faith in its institutions and the inability of those institutions to fund and perform even the most basic services.